Prevention of Oppression and Mismanagement

This article analyses various aspects to be considered while filing a petition under Section 241 under the Companies Act, 2013, specifically on the maintainability, in light of order passed by National Company Law Tribunal, Chennai Bench in the matter of John S. Dorai v. Church of South India Trust Association [2020] 116 taxmann.com 364 (NCLT- Chennai )

Qualification to file petition under Section 241 of the Act.


As per Section 244 of the Companies Act, 2013, following members of a company shall have the right to apply under Section 241 namely:—


a) in the case of a company having a share capital, not less than one hundred members of the company or not less than one-tenth of the total number of its members, whichever is less, or any member or members holding not less than one-tenth of the issued share capital of the company, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares;


b) in the case of a company not having a share capital, not less than one-fifth of the total number of its members

Provided that the Tribunal may, on an application made to it in this behalf, waive all or any of the requirements specified in clause (a) or clause (b)so as to enable the members to apply under Section 241.


What are the grounds to file petition under Section 241.

The Section 244 is clearly mentioning the qualification for filing the Petition before National company Law Tribunal in the matter of Oppression and Mismanagement. As per the provisions of Section 241 of the Companies Act, 2014, any member of a company, who qualifies under Section 244, can file the petition under 241, on any of the following grounds:-


  1. the affairs of the company have been or are being conducted in a manner prejudicial to public interest or in a manner prejudicial or oppressive to him or any other member or members or in a manner prejudicial to the interests of the company; or

  2. the material change, not being a change brought about by, or in the interests of, any creditors, including debenture holders or any class of shareholders of the company, has taken place in the management or control of the company, whether by an alteration in the Board of Directors, or manager, or in the ownership of the company’s shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to its interests or its members or any class of members,

As per the order passed by Hon’ble NCLT, Chennai Bench, in the matter of John S. Dorai v. Church of South India Trust Association [2020] 116 taxmann.com 364 (NCLT- Chennai ) the qualification given one (1) to ten(10) cannot be read as qualification zero(0) to ten(10). "A member" u/s.241 cannot be read as non-member just because an application could be allowed even a shortfall is there to the qualification u/s.244 of the Companies Act, 2013.


The Principle behind Oppression and Mismanagement

The doctrine in Oppression and Mismanagement is, the persons managing the affairs of the company shall not act unfairly so as to cause prejudice to the members of the company. The reason for manifestation of cause of action is, at times, the actions may be legal but if such action is invented solely to cause prejudice to the economic interest of the member because every company comes into existence to get profits out of it, to meet the legitimate expectations of the members as per the understanding from the Memorandum of Association and Articles of Association, by and large, the object of incorporation of company being for earning profits, and to ensure that management remains not unfairly prejudicial to a sect of members, the member unfairly prejudiced can proceed against the Management to arrest such kind of unfair prejudice against him or them. But to initiate such action under section 241, he shall have either 10% shareholding or 1/10th in number out of number of members of the Company.


If at all, the persons conducting the affairs of company get involved either to have personal gain or to cause loss to the members, who cannot control the company, that being unfair and a visible departure from fair play, member who is aggrieved of such action is given an extraordinary relief to seek remedy against such an action. Here the concern must be, it is not an ordinary relief, it is indeed an extraordinary relief so as to curtail the majority remaining unfair to the minority against the general expectations of these aggrieved parties when they have come into the company.


Maintainability of a Petition under Section 241

The Hon’ble Bench had laid down three rules to determine the maintainability of a petition under Section 241 of the Act. As per the said Rules, before admitting the petition, the same has to successfully cross all the three barriers, to make a prima facie case. Following are the rules laid down for identifying the maintainability of a petition.


Rule 1- Jurisdiction of NCLT

The party shall satisfy that the Tribunal has jurisdiction to entertain the petition, under Companies Act, the jurisdiction conferred upon NCLT is section based jurisdiction, it must always be in the back of everybody's mind that NCLT has no omnibus jurisdiction to deal with the entire Act, therefore when right of initiating action under section 241 is qualified, unless that threshold is met, petition numbering itself shall not happen. It could be numbered when qualification is not met provided a waiver application has been simultaneously filed showing the absence of requisite shareholding or number.


One subtle difference to be taken cognizance while considering waiver under section 244 is, one to ten threshold discretion is left to the Tribunal but not from zero number or non-member. Though there are precedents to entertain petition when a composite petition of section 241 r/w section 58/59 comes, such as when factum of shareholding itself is in dispute, this factum of dispute shall be such that either the petitioner shall prove share certificates ought to be issued which has not been issued or transmission ought to have taken place but has not taken place. Beyond this, when the petitioner himself has not proclaimed himself as member, such person cannot initiate proceeding under section 241 of the Companies Act 2013.


This is all about jurisdiction, in view of the above legal principle, waiver entailment under section 244 cannot be construed as contra entitlement to a non-member to file petition. If such transgression is allowed, it will become in violation of "a member" rule set out in section 241 of the Company Petition. Therefore "a member" principle is not in compliance, neither section 241, nor section 244 jurisdiction is open either to the petitioner to file petition or to the Tribunal to entertain such petition. This is about Rule-1.


Rule 2 – Respondents and act of oppression.

About Rule-2, when Rule-1 is complied with, Rule-2 have to be observed to check the maintainability of a petition. The Rule 2 is divided into 3 sub-rules.

Sub-Rule-1 is as to whether petition is against the Proper and necessary Respondents, here proper Respondents as per section 241 are persons in management of the affairs of the company, where in the aggrieved is "a member".

Sub-Rule 2 is as to whether any action of the necessary Respondents is complained of, if complained.

Sub-Rule 3 is to see as to whether such action is prejudicial to the public interest or in a manner prejudicial or oppressive to the complaining member or members or in a manner prejudicial to the interest of Company or any material change has been brought in the management or control of the company by change of Board of Directors or in the ownership of the company's share or if it has no share capital, in its membership which is likely that the affairs of the company will be conducted in a manner prejudicial to its interest or its members or any class of members.


Rule-3

If Rule-1 and Rule-2 are in compliance in the Company Petition then it could be said that the company petition has cause of action to proceed against the answering Respondents. After this cause of action is ascertained from the Company Petition, then a situation will arise to see as to whether prima facie evidence is there to pass an interim relief or to proceed further with regard to the Company Petition filed.


Analysis of "prejudice".

In order to check the effect of action of the Respondents on the Company and its members and to analyse whether those actions had prejudicially affected the complainants, following parameters to be observed.

  1. If any fraud or siphoning has taken place, it cannot be straight away said that it is an unfair play against the members or against the Company.

  2. In order to put it within the ambit of Section 241, it has to be ascertained how much control the company has over the respective assets, and whether the persons managing the company are really involved in such an action

  3. It is also important to note that, whether such action is an action committed with a fraudulent intention and whether such action has already been determined as fraudulent action by the management

  4. If the fraudulent intention is evident, then it has to be ensured that such action has caused or will be causing prejudice either to the members or to the company.

  5. If any prejudice is so caused, it has to be seen whether such action could be treated as a just and equitable ground for winding up of the company.

  6. Even if action is unfair and prejudicial to any of the members, for passing a relief under sec.242 of the Companies Act, 2013, second condition in the twin condition to pass reliefs i.e. just and equitable ground for winding up shall be proved.

The above factors may be followed while preparing a petition under section 241 of the Act.


Bijoy P Pulipra


Picture courtesy : Internet

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